Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Is Charlie Munger Right about Alibaba (BABA)?

The notion China is the future and America the past got an enormous boost from Warren Buffett’s long-time sidekick, Charley Munger.

Munger’s Daily Journal Corporation (NASDAQ: DJCO) bought 165,320 shares of Alibaba Group (NYSE: BABA) in the first quarter of 2021, Yahoo! Finance reveals. The Alibaba purchase is attracting attention because Munger, like his friend Buffett, is a legendary value investor known to be bullish on America.

We know Munger for acquiring stocks in distressed but moneymaking companies and holding them forever. For example, Daily Journal’s two biggest holdings are Wells Fargo (WFC) and Bank of America (BOA) two controversial banks he bought during the 2008.

Why did Munger buy Alibaba?

However, Munger made one famous retail play Costco (COST) where he serves on the board. Now Yahoo!Finance estimates that Alibaba (BABA) is Daily Journal’s third largest holding.

Alibaba (BABA) is going through a rough time. Its legendary founder and former CEO Jack Ma has vanished. Nobody knows where Ma is or what he is doing. The popular theory is that Ma is being detained by Chinese secret police, However, Ma could be hiding somewhere.

Ma’s disappearing act and the failure of his controversial Ant Financial IPO cast doubt on Alibaba’s future. Yet Charley Munger still believes in Alibaba and buys it.

Does Alibaba Make Money?

Alibaba (NYSE: BABA) makes enormous amounts of money. Alibaba reported a $15.298 billion annual gross profit and a $7.51 billion quarterly operating income on 12 December 2020.

Moreover, Alibaba experienced incredible growth in 2020. The quarterly gross profit rose from $11.078 billion on 31 December 2019 and the quarterly operating income from $5.682 billion on 31 December 2019.

Similarly, Alibaba’s quarterly revenues grew from $22.838 billion on 30 September 2020 to $33.883 billion on 31 December 2020. Plus, Stockrow estimates Alibaba’s revenues grew by 46.10% in the quarter ending 31 December 2020.

What Value Does Alibaba have?

In comparison, Alibaba’s quarterly operating cash flow rose from $14.168 billion on 31 December 2019 to $16.441 billion on 31 December 2020. However, the quarterly ending cash flow fell from $18.631 billion on 31 December 2019 to $3.977 billion on 31 December 2020.

However, Alibaba borrows enormous amounts of money it reported quarterly financing cash flows of $8.828 billion on 31 December 2019 and $1.462 billion on 30 September 2020. Yet, the quarterly financing cash flow fell to -$838 million on 31 December 2020. Alibaba had total debts of $18.038 billion on 31 December 2020.

Impressively, Alibaba had $73.347 billion in cash and short-term investments and $250.515 billion in total assets on 31 December 2020. The cash and short-term investments rose from $54.319 billion on 31 December 2019, and the total assets grew from $189.534 billion on 31 December 2019.

Alibaba Gains Value in pandemic

Thus Alibaba gained an enormous amount of cash and value during a pandemic. That is why Munger bought Alibaba (BABA).

Moreover, Alibaba’s share value has grown slightly over the past year. Alibaba’s share price rose from $212.13 on 20 April 2020 to $234.78 on 19 April 2021. Similarly, the Alibaba Market cap grew from $565.15 billion on 17 April 2020 to $648.57 billion on 16 April 2021.

Thus, Alibaba is an excellent growth stock with a high margin of safety’s that another reason why Munger loves it. Additionally, Alibaba has achieved those financial numbers without Jack Ma, who is still missing in action. Thus, Alibaba seems to meet Buffett’s criteria of the company anybody even your idiot nephew can run.

Alibaba is a Value Investment

Consequently ,is a value investment. On the other hand, Alibaba is a morally questionable investment. Remember, Alibaba does most of its business in the People’s Republic of China and is beholden to the Communist Party.

However, Alibaba is not the Communist Party and will make enormous amounts of money if the Chinese people overthrow the Communists and drive Zi Jinping into exile. Yet, Alibaba will also make enormous amounts of money if Xi and the Communists stay in power.

Interestingly, I consider Alibaba a better stock than Munger’s Daily Journal Corporation (NASDAQ: DJCO). I think Mr. Market overpriced Daily Journal at $317.75 on 19 April 2021.

Moreover, Daily Journal loses money and has little value. Daily Journal reported quarterly revenues of $10.42 million and a quarterly gross profit of $10.27 million on 31 December 2020. In addition, Daily reported a $320,000 quarterly operating loss on 31 December 2020.

If you are looking for an interesting investment in China, you need to investigate Alibaba. Charley Munger is right, Alibaba is a growing and moneymaking that Mr. Market estimates.